3 essential components of Domestic factor Income

Generally, there are three components of Domestic factor Income. There are:

(i) Compensation of employees

(ii) Operating surplus

(iii) Mixed income of the self-employed.

i. Compensation of employees:

Compensation of employees refers to the payments made by the producers to their employees. Such payments are made in the form of wages and salaries as well as contributions to social security schemes in respect of their employees. As a matter of fact, compensation of employees is broadly divided in to the following two groups:

(a) Wages and Salaries:

Wages refer to the payments made in cash or kind. Wages in kind are in form of rent-free accommodation with free electricity and water etc. Generally, wages are paid to blue-collar workers who do physical labour.

Salaries refer to the payments in cash or in kind to white-collar workers who do mental labour. This is applicable for all employees employed in the economy with any type of producing enterprise. The amount paid as bonus, Dearness allowance, House rent allowance, City compensatory allowance, Medicine allowance are include in wages. Wages and salaries are jointly known as compensation of employees.

These wages do not include any reimbursement of expenses incurred by the employees for business purposes, such as travel expenses, Hotel expenses or Entertainment expenses and Daily allowance etc. These are not compensation of employees but are intermediate consumption expenditure for promoting business.

(b) Social Security Contributions:

Besides wages and salaries, the employers make payment to social security schemes on behalf of their employees. It includes employers’ contribution to the employees’ provident fund, group insurance, life insurance, etc.

In case of General Government, compensation of employees consists of wages and salaries paid to government employees including that of President, State governors, Ministers, Members of Parliament and State legislatures, pension to employees, ration and uniform to defence and police personnel etc.

ii. Operating Surplus:

Operating surplus is the excess of net value added at factor cost over compensation of employees. It is the sum total of income earned by firms from property and entrepreneurship in the form of rent, interest and profit. In other words, operating surplus is the sum of property income from entrepreneurship. It also includes surplus of public sector.

(a) Property income:

Property includes in itself land, mines, building, machines, capital etc. Land and building earn rent. Rent includes rent actually received and the imputed value of rent of the owner occupied houses. Owners of mines get royalty for permitting others to extract minerals like coal, iron ore etc. out of them. Royalties received for the use of patents, copyrights and trademarks and interest on capital also come under property income.

Thus, Property Income = Actual rent + Imputed value of rent + Royalty + Interest on capital.

(b) Profits:

Profit is the income received by an entrepreneur. It is the excess of total revenue earned from the sale of output over total cost of production. Profit is earned by entrepreneurs for organizing production, undertaking innovations and bearing risks and uncertainties. Total profits of a joint stock company include dividend distributed, undistributed profits and corporate profit taxes paid to the government. Thus,

Total Profit = Dividends + Undistributed profit + Corporate profit tax.

General government does not have any operating surplus. Government enterprises are not owned by shares holders. So there is no question of payment of dividends. Surplus of public sector are received by the government. These may be regarded as operating surplus and are added to calculate domestic income.